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Tax relief for offshore gas exploration firms

27 January 10 20:11 GMT

Offshore gas exploration companies are to get up to £160m of tax relief for each field under the most daunting areas of British waters.

Chancellor Alistair Darling announced the planned legislation to encourage more drilling to the west of Shetland.

The Treasury believes the area contains about a fifth of the UK's remaining oil and gas reserves.

The news came as Energy Minister Lord Hunt announced a new round of licensing for exploration under UK waters.

Announcing the tax relief, Mr Darling said: "The government recognises the importance of the UK oil and gas industry to our economy and the dependable foundation it provides for the UK's energy security.

"We must ensure that the UK taxpayer receives a fair return from the extraction of our national resources and we are committed to maximising the economic exploitation of the UK's reserves.

"Today's announcement will continue to support investment in the North Sea, the fuel this delivers, the contribution this makes to our economy, and the jobs and skills the industry supports and develops."

If passed at Westminster, the £160m tax break will be available over the first five years of a gas field's production, and would apply to up to £800m of investment.

Fields that could be affected include the Laggan and Tormore fields.

They lie under 600m of water, roughly 130km north-west of Shetland, and Total is scheduled to start production from 2014.

As that joint project includes two fields, it could qualify for up to £320m in tax breaks.

A source at the Treasury said the tax relief is not money lost to the Exchequer, as it is tax that could not be counted upon if the incentives were not put in place.

The industry body Oil and Gas UK welcomed the move, saying it can help encourage investment which is critical to developing both oil and gas reserves west of Shetland.

Malcolm Webb, its chief executive, said: "This could result in early investment of over £2bn and another £12bn over the next eight years, ultimately bringing almost two billion barrels of oil and gas into production.

"Furthermore, the establishment of this gas delivery infrastructure will stimulate exploration as it will enhance the viability of future discoveries in this frontier area.

"This can only lead to greater recovery of the UK's oil and gas resource. Therefore, this is a potential 'basin-opener'.

"This move further underlines the importance of domestic oil and gas in our energy supply."

Migratory whales

Lord Hunt's announcement of the 26th offshore licensing round includes blocks in all areas of UK seas, including 14 that were won in the past but were then left fallow - that is, not taken up by exploration companies.

The energy minister said that estimates suggest around 20 billion barrels of oil, or its equivalent, remains under British waters.

New licences in 'frontier' areas, are being given extended periods of nine years to give companies time to establish geological data.

However, the frontier west of Rockall, which lies 289 miles from the British mainland, is not to have oil exploration in the round being announced, as there is insufficient information about the geology of the seabed, and because of concerns about damage to the marine environment.

An environmental assessment carried out for the Department of Energy and Climate Change last year raised concerns about the impact of seismic testing on migratory whales in the Atlantic.

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